691 F.3d 500 (3rd Cir. 2012), 10-3088, Post v. St. Paul Travelers Ins. Co.

Docket Nº:10-3088, 10-3300.
Citation:691 F.3d 500
Opinion Judge:AMBRO, Circuit Judge.
Party Name:Benjamin A. POST, Esquire, Appellant (No. 10-3088) v. ST. PAUL TRAVELERS INSURANCE CO., Appellant (No. 10-3300).
Attorney:George A. Bochetto, Esquire (Argued), Bochetto & Lentz, Marc J. Zucker, Esquire, Weir & Partners, Philadelphia, PA, Charles S. Fax, Esquire, Rifkin, Livingston, Levitan & Silver, Bethesda, MD, for Appellant/Cross-Appellee. Robert L. Byer, Esquire (Argued), Duane Morris, Pittsburgh, PA, Francis J....
Judge Panel:Before: AMBRO, CHAGARES and HARDIMAN, Circuit Judges. HARDIMAN, Circuit Judge, concurring in part and dissenting in part.
Case Date:July 31, 2012
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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691 F.3d 500 (3rd Cir. 2012)

Benjamin A. POST, Esquire, Appellant (No. 10-3088)

v.

ST. PAUL TRAVELERS INSURANCE CO., Appellant (No. 10-3300).

Nos. 10-3088, 10-3300.

United States Court of Appeals, Third Circuit.

July 31, 2012

Argued Jan. 25, 2012.

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George A. Bochetto, Esquire (Argued), Bochetto & Lentz, Marc J. Zucker, Esquire, Weir & Partners, Philadelphia, PA, Charles S. Fax, Esquire, Rifkin, Livingston, Levitan & Silver, Bethesda, MD, for Appellant/Cross-Appellee.

Robert L. Byer, Esquire (Argued), Duane Morris, Pittsburgh, PA, Francis J. Deasey, Esquire, Henri Marcel, Esquire, Stephen J. Parisi, Esquire, Deasey, Mahoney, Valentini & North, Robert M. Palumbos, Esquire, Duane Morris, Philadelphia, PA, for Appellee/Cross-Appellant.

Before: AMBRO, CHAGARES and HARDIMAN, Circuit Judges.

OPINION

AMBRO, Circuit Judge.

Before us are an appeal and a cross-appeal arising from an action brought by attorney Benjamin Post (" Post" ) against his legal malpractice insurer, St. Paul Travelers Insurance Company (" Travelers" ), for, among other things, insurance bad faith and breach of contract. The District Court granted summary judgment in favor of Travelers on the bad faith claim, the order from which Post now appeals. Travelers appeals the District Court's damage award of $921,862.38 to Post for breach of contract.

Post argues that his bad faith claim was erroneously dismissed at summary judgment, and asserts, among other things, that there was sufficient evidence to create a genuine issue of material fact that Travelers lacked a reasonable basis to deny coverage. Travelers contends that the District Court erred by awarding damages

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on Post's breach of contract claim because the malpractice insurance policy contained an explicit coverage exclusion for sanctions proceedings.

For the reasons stated below, we affirm the District Court's grant of summary judgment in Travelers' favor on Post's bad faith claim, but we vacate and remand with respect to the District Court's damage award for breach of contract.

I. Factual and Procedural Background

A. The Bobbett Case

In 2003, Post and Tara Reid, both employed at the time by the law firm of Post & Schell, P.C., were retained to defend Mercy Hospital-Wilkes Barre, Mercy Healthcare Partners, and Catholic Healthcare Partners (collectively, " Mercy" ) in a medical malpractice action filed in the Court of Common Pleas of Luzerne County, Pennsylvania, captioned Bobbett, et al. v. Grabowski, et al., Case No. 4310-C-2003.

In May 2005, Post left Post & Schell to start a new law firm with his wife— Post & Post, L.L.C. Thereafter, he continued to represent Mercy in the Bobbett matter, and Reid joined Post & Post as an associate.

Trial of the Bobbett case began in September 2005. During its first week, the plaintiffs introduced evidence suggesting that Post and Reid had engaged in misconduct during discovery. Specifically, on Friday, September 23, 2005, plaintiffs' counsel examined a risk manager, Anne Marie Zimmerman, regarding allegedly undisclosed redactions from medical policies produced by Mercy in discovery. Zimmerman testified that Post and Reid were responsible for the redactions. Plaintiffs' counsel characterized Zimmerman's testimony as " establish[ing] that [Post and Reid] covertly redacted and withheld information from documents ..., and/or simply failed to produce requested documents without permission from this Court and/or notice to Plaintiffs' counsel." Plaintiffs' counsel then suggested to the presiding Judge, Hon. Peter Paul Olszewski, Jr., that the trial be adjourned for the day. On learning of this possible discovery misconduct, Mercy replaced Post as its counsel.

Fearing that the jury now believed that there had been a " cover-up" involving its lawyers, and concerned with the " substantial potential of uninsured punitive exposure," Mercy, represented by new counsel, began settlement negotiations with the plaintiffs over the weekend. The negotiations resulted in a settlement of $11 million, which represented the full extent of Mercy's medical malpractice policy limits. The settlement was presented to Judge Olszewski in court on Tuesday, September 27, 2005. It included a release among the parties, but with one significant caveat: the settlement agreement did not release Post, Reid, Post & Schell, and/or Post & Post from any liability they, or any of them, might have to Mercy for malpractice. Mercy did in fact threaten Post with a malpractice suit.

B. The Policy

Post & Schell was insured against claims of legal malpractice by Travelers under Policy # GL09000524 (the " Policy" ). The Policy had an annual premium of $226,500, and had an occurrence and aggregate limit of $10,000,000. The Policy insured the firm and " protected persons" ( i.e., the firm's attorneys) against " claims" and " suits" asserting malpractice. It thus insured Post for any alleged acts within the scope of coverage occurring (1) during the Policy's term and (2) while Post was employed by Post & Schell.

The Policy defines a " claim" as a " demand that seeks damages." It states that a claim is considered " to be first made or

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brought" (1) on the date that Travelers or any protected person " first receives written notice of such claim," or (2) when Travelers receives written notice from a protected person " of a specific wrongful act that caused the loss which resulted in such claim or suit." A " suit" is " a civil proceeding that seeks damages."

The Policy imposes on Travelers the " duty to defend any protected person against a claim or suit ... even if any of the allegations of such claim or suit are groundless, false, or fraudulent." Travelers' duty to defend expressly includes the duty to pay " defense expenses incurred by, or for, the protected person for the claim or suit." " Defense expenses" are " fees, costs, and expenses that result directly from the investigation, defense, or appeal of a specific claim or suit," including " [f]ees, costs, and expenses of hired or appointed attorneys" and " [t]he cost of the proceedings involved in the suit, including court reporter's, arbitrator's and mediator's fees." The Policy excludes from its definition of " damages" any " civil or criminal fines, forfeitures, penalties, or sanctions...." It does not define " sanctions."

The Policy provides in pertinent part as follows:

What This Agreement Covers

Lawyers professional liability.

We'll pay amounts any protected person is legally required to pay as damages for covered loss that:

• results from the performance of, or failure to perform, legal services by or on behalf of any protected person; and

• is caused by a wrongful act committed on or after any retroactive date that applies and before the ending date of this agreement.

* * * * * *

Damages means:

• compensatory damages imposed by law; and

• punitive or exemplary damages imposed by law if such damages are insurable under the law that applies.

But we won't consider damages to include any:

• civil or criminal fines, forfeitures, penalties, or sanctions; or

• legal fees charged or incurred by any protected person.

* * * * * *

Defense expenses means the following fees, costs, and expenses that result directly from the investigation, defense, or appeal of a specific claim or suit:

• Fees, costs, and expenses of hired or appointed attorneys.

• The cost of the proceedings involved in the suit, including court reporter's, arbitrator's, and mediator's fees.

• Fees for witnesses.

• Independent expert's and special investigator's fees, costs, and expenses.

* * * * * *

Exclusions— What This Agreement Won't Cover

Criminal, dishonest, or fraudulent wrongful acts or knowing violation of rights or laws. We won't cover loss that results from any criminal, dishonest, or fraudulent wrongful act or any knowing violation of rights or laws committed by:

• any protected person; or

• anyone with the consent or knowledge of any protected person.

C. Mercy's Legal Malpractice Claim Against Post

On Sunday, September 25, 2005, James Saxton, an attorney with the law firm of Stevens & Lee, Mercy's newly retained counsel, advised Post's father, Barton Post, that Mercy intended to bring a lawsuit for legal malpractice against Post, and

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that the claim should be reported to Post's insurance carrier. Saxton asked for the name of the insurance carrier so that he could make a report.

Michael Williams, Vice President for Risk and Insurance for Catholic Healthcare Partners, sent two letters on October 6 to Post advising him that he was terminated as Mercy's counsel and instructing him not to destroy any documents from the Bobbett case.

On October 12, Williams sent Post a third letter, this time asserting that the Bobbett settlement was forced on Mercy because the alleged " cover-up" by Post and Reid during discovery had caused Mercy " substantial ... uninsured punitive exposure."

Williams stated the following:

[W]hat clearly drove the settlement was the damage done during the testimony of Anne Marie Zimmerman regarding the document production issues raised during her testimony. More specifically is the fact that there was a claim in front of the jury that there was a " cover-up" that appeared to involve our lawyers. Further, under those circumstances and knowing that Ms. Zimmerman would likely invoke her Fifth Amendment right or testify under immunity, we absolutely disagree regarding your ability to rehabilitate. There were other aggravating factors that...

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